I was asked three really good questions last week.
The first was – “What are my thoughts of the effect of the Coronavirus on the global markets and do we need to take any action on my investments?”
The second was – “Do I have to take all of my tax-free cash in one go?”
And finally, “how safe is my pension if my pension provider was to go bust”
I have given brief answers to these question on my question and answer forum at but thought you might find it helpful if I looked at these questions in more depth.
I am keeping up to date with developments but it is a fast-moving crisis. I started writing this on Thursday and by Friday we learn the first case Coronavirus has been reported in the UK. By Saturday the FTSE 100 had fallen 1.3% and the yield on 15-year gilts had fallen to 0.86% which is close to the all time low in recent years.
It is now Tuesday 4th February and the FTSE is rising. This just shows why we shouldn't necessarily worry unduly.
Three things strike me about the emerging crises:
First of all, this is obviously a serious matter and could easily turn result a global financial crisis. I have read one headline asking ‘is China's Coronavirus the Next Black Swan?’
Secondly, there are some experts saying, serious as this is, it is not necessarily going to be a disaster
Thirdly, there is respect for the Chinese government for reacting to the crises in a responsible matter and doing all they can to contain the spread of the virus.
Clearly this is a serious and complex situation and we don’t know how events will unfold over the next few days / weeks but as I explain below, I don’t think there is any need to panic.
My first reaction when asked about the possibility of a serious stock market crash or worries about increased volatility is to say ‘don’t panic’. This is not just lazy thinking but my belief that if you have a well-diversified portfolio manged by a competent investment manager you should be well placed to weather any investment storms that come your way.
My second reaction is the opposite of the first and to start worrying on behalf of my clients because investing is a serious business. However, I soon stop worrying when I remember a few basic rules of investing which I try to follow:
- Make sure you have sufficient liquid assets (e.g. cash) to cover any income or cash you might need in the near future
- Review your attitude to risk.
- If you are not sure about this, or what to review it, ask us for another risk questionnaire
- Be aware of the behavioural / emotional side of investing
- Remember the basic rule “don’t put all your eggs in one basket”
- Don’t forget that you will have invested for growth over the longer term and short-term volatility should be expected
- Continually monitor your investments to make sure they are aligned with your attitude to risk
This is easier said than done and the test of a good adviser (and a savvy client) is make sure the theory is put into practice.
If you have any questions or concerns, please do not hesitate to contact me
Do I have to take all of my tax-free cash in one go?
No you don't. You can spread your tax-free cash over a period of time.
There are a number of diffrent ways to phase your tax-free cash. One of the ways is called "Salami Slicing"
Think of your pension as a long salami – OK think of a £ 100,000 pension pot as being made up of 10 separate pots with £ 10,000 in each pot.
Instead of chopping off 25% of the salami and eating it (sorry, spending it) without giving any of it to the tax man, you can just chop of a slice of the salami (e.g. £ 10,000) and take 25% (£2,500) tax free.
Continuing with the salami theme, if you only eat a small amount of salami instead of a large amount, you may go hungry. In pension terms if you only take £2,500 of income instead of £25,000 you may not have enough cash or income.
Therefore, you can eat the remaining 75% of the pension salami but you will pay tax on this.
There are various ways to cut off your slices of salami and even though they have the same effect they have different names. Some options have many different names to make it even more complicated. These names include:
- Uffle puffle* – sorry, uncrystallised funds pension lump sum (UFPLS)
- Partial encashment
- Phased Retirment
I googled uffle puffle pension and I came across this hilarious article which I had written in 2014 for my friend John Lappin. I will reproduce this as a blog here but you can see the original here www.mindfulmoney.co.uk/mindful-news/watch-out-for-pension-dementors
The term uffle puffle was brought to my attention by Vince Smith-Hughes. I first heard the explanation of salami slicing from Rupert Baron.
I produced some PowerPoint slides on salami slicing and you can view these here Phased Tax-Free Cash PowerPoint
How safe is my pension if my pension provider was to go bust?
There is a very good article on the Daily Mail website sponsored by Financial Services Compensation Scheme.
It starts by saying "pension savers is that workplace defined contribution schemes provided by UK insurers, Sipps and annuities are all protected by the Financial Services Compensation Scheme (FSCS)."
Read the article in full